Global Growth Steady Amid Slowing Disinflation and Rising Policy Uncertainty

IMF Blog, July 16, 2024

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Authors: Pierre-Olivier Gourinchas
Published: July 16, 2024

Overview

Author: Pierre-Olivier Gourinchas
Date: July 16, 2024
High-level summary: Global growth projections unchanged at near-term levels, with notable shifts across regions and rising downside risks from slower disinflation and growing policy uncertainty.

Growth projections and regional dynamics

Global growth projections:
- "3.2 percent" this year
- "3.3 percent" next year
Regional developments:
- Major advanced economies are becoming more aligned as output gaps are closing.
- United States: showing increasing signs of cooling, especially in the labor market, after a strong 2023.
- Euro area: poised to pick up after a nearly flat performance last year.
- Asia’s emerging market economies remain the main engine for the global economy.
China and India:
- Growth in India and China is revised upwards and accounts for almost half of global growth.
- By "2029", growth in China is projected to moderate to "3.3 percent".

Inflation, disinflation, and key drivers

Global inflation projection:
- Projected to slow to "5.9 percent" this year from "6.7 percent" last year.
Disinflation progress:
- Broadly on track for a soft landing, but progress has slowed in some advanced economies, especially the United States.
Primary drivers and concerns:
- Headline inflation shocks—mostly energy and food prices—were central to the inflation surge and subsequent decline across many countries.
- Energy and food price inflation are now almost back to prepandemic levels in many countries, while overall inflation is not.
- Goods prices remain high relative to services (a legacy of the pandemic boosting goods demand while restricting supply), making services comparatively cheaper and increasing demand for services and the labor to produce them.
- Services prices and wage inflation are identified as the two main areas of concern for the disinflation path.
- Real wages are now close to prepandemic levels in many countries.
Risk implication:
- Unless goods inflation declines further, rising services prices and wages may keep overall inflation higher than desired, posing a significant risk to the soft-landing scenario.

Downside near-term risks highlighted

Two downside near-term risks have become more prominent:

1. Further challenges to disinflation in advanced economies could force central banks, including the Federal Reserve, to keep borrowing costs higher for even longer.

Potential consequences: overall growth at risk, increased upward pressure on the dollar, harmful spillovers to emerging and developing economies.

2. Fiscal challenges that need more direct action.

Deterioration in public finances has left many countries more vulnerable than foreseen before the pandemic.
Projected fiscal consolidations are largely insufficient in too many countries.
United States: at full employment, maintains a fiscal stance that pushes its debt-to-GDP ratio steadily higher, with risks to both the domestic and global economy; increasing US reliance on short-term funding is also worrisome.
With higher debt, slower growth, and larger deficits, debt trajectories could become much less comfortable in many places if markets send government bond spreads higher, with risks for financial stability.

Policy uncertainty, trade, and multilateral coordination

Trade and industrial policy concerns:
- Gradual dismantling of the multilateral trading system is a key concern.
- More countries are imposing unilateral tariffs or industrial policy measures with questionable compliance with World Trade Organization rules.
- The surge in unilateral measures is likely to:
- Distort trade and resource allocation
- Spur retaliation
- Weaken growth
- Diminish living standards
- Make it harder to coordinate policies addressing global challenges such as the climate transition
Macroeconomic view on external balances:
- Macroeconomic forces—desired national savings and domestic investment together with global rates of return on capital—are the primary determinants of external balances.
- If imbalances are excessive, trade restrictions would be both costly and ineffective at addressing the underlying macroeconomic causes.
- Trade instruments have their place but should be used sparingly, within a multilateral framework, and to correct well-identified distortions.
Multilateral cooperation:
- Constructive multilateral cooperation remains the only way to ensure a safe and prosperous economy for all, as shown over eight decades since Bretton Woods.

Policy recommendations and priorities

Fiscal policy:
- Gradually and credibly rebuild buffers while protecting the most vulnerable.
- Stronger buffers free resources to address emerging spending needs such as the climate transition or national and energy security.
- Stronger buffers provide fiscal resources needed to address unexpected shocks; current projected consolidations are generally insufficient.
Inflation and labor-market considerations:
- Address persistent goods price pressures to reduce upward pressure on services prices and wages.
- Monitor services price and wage inflation closely to safeguard the soft-landing scenario.
Trade and multilateralism:
- Avoid unilateral trade and industrial measures that risk retaliation and inefficiency.
- Use trade instruments sparingly, within multilateral frameworks, and to correct well-identified distortions.
Structural policies for medium-term growth:
- Improve resource allocation within and across countries.
- Expand better education opportunities and equality of chances.
- Promote faster and greener innovation.
- Strengthen policy frameworks to sustainably improve medium-term growth prospects.

Source: Global Growth Steady Amid Slowing Disinflation and Rising Policy Uncertainty — Pierre-Olivier Gourinchas, July 16, 2024.